Oct. 17 (Bloomberg) -- The dollar rose against the yen and euro on speculation Federal Reserve officials including Anthony Santomero, will this week reinforce the central bank's case that further interest rate increases are necessary in order to prevent inflation from accelerating.

Further inflation signs came today as the Fed's New York branch reported prices paid by New York state manufacturers rose this month, even as the overall factory index fell. New orders at factories also rose.

``The orders data are still strong, pointing to a recovery in the coming months, and the still-elevated prices component points to ongoing Federal Reserve tightening,'' said Nick Bennenbroek, vice president of currency research at Brown Brothers Harriman & Co. in New York. ``The dollar is still getting support from the fact that U.S. interest rates are currently higher and should go higher still.''

The U.S. currency rose to $1.2025 per euro at 9:12 a.m. in New York, from $1.2075 late on Oct. 14 in New York, according to foreign-exchange dealing system EBS. Versus the yen, the dollar climbed to 114.84 from 114.08.

The dollar is strengthening as traders bet higher rates will increase the yield advantage offered by U.S. debt over similar-maturity bonds in Germany and Japan. Santomero, President of the Philadelphia Fed Bank, is the first of at least five central bank officials expected to speak on monetary policy and the economy this week.

``The risk is that rate increases are going to go beyond what the market is currently pricing in, so people are watching very closely for clues from the Fed,'' said Sonja Marten, a currency strategist at Dresdner Kleinwort Wasserstein AG in Frankfurt. ``The rate story giving the dollar some strength.''

Winning Streak

Last week the dollar gained for a fifth week against the yen and advanced against the euro after Fed officials William Poole and Mark Olson indicated they are concerned that inflation may accelerate.

Fed Chairman Alan Greenspan, Fed Vice Chairman Roger Ferguson, Governor Donald Kohn, Fed Bank of San Francisco President Janet Yellen, Philadelphia Fed Bank President Anthony Santomero and Fed Bank of New York President Timothy Geithner all speak this week.

Some traders also bought the dollar on speculation its decline on Oct. 14, following futures broker Refco Inc.'s closure of its securities unit, was excessive.

Refco Reaction `Overdone'

``The dollar was sold on the Refco news last week and perhaps that got a little overdone,'' said Derek Doody, a proprietary currency trader at Bank of Ireland Plc in Dublin. ``There's been no new bad news over the weekend and that's probably good news for Refco and good news for the dollar.''

The dollar fell 0.4 percent on Oct. 14 after Refco said it closed Refco Securities LLC, which accounts for more than half of its gross revenue, and the Securities and Exchange Commission barred the company's shareholders from withdrawing capital.

A day earlier, the dollar erased gains after Refco blocked customer withdrawals from a currency trading unit, raising speculation traders were forced to sell assets to raise funds.

The dollar may advance for a sixth week against the yen, the longest rally in 17 months, and advance against the euro, as continued interest rate increases by the Fed boost the yield advantage offered by U.S. assets, according to a Bloomberg News survey of foreign exchange traders, strategists and investors.

Yield Seekers

``The market is seeking the higher yields offered by dollar assets and the Fed's concern over inflation only adds to the chances the rate gap will widen,'' said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank, a unit of Japan's biggest bank.

Fifty-eight percent of the 53 people surveyed by Bloomberg News on Oct. 14 from Sydney to New York advised buying the dollar against the euro, compared with 22 percent who recommended selling the U.S. currency. Fifty-three percent predicted it would rise versus the yen.

The extra yield offered by 10-year U.S. Treasuries over European debt of the same maturity is hovering near a five-year high of 121 basis points, or 1.21 percentage point, reached Oct. 12. It was at 119 basis points today, up 66 basis points on the year. U.S. 10-year notes yield 2.87 points more than comparable Japanese debt, 10 basis points more than at the start of the year, Bloomberg data show.

The Fed raised its benchmark rate to 3.75 percent on Sept. 20 and is expected to lift it to 4 percent at its next meeting Nov. 1. The European Central Bank has held its rate at 2 percent for the past two years and the Bank of Japan kept borrowing costs at almost zero for 4 1/2 years.

The Oil Effect

William Poole, president of the Fed's St. Louis branch, on Oct. 14 told reporters in Washington the central bank is trying to prevent oil price rises ``becoming a generalized inflation problem.'' Fed Governor Mark Olson said two days earlier in a speech to Seattle University's Albers School of Business and Economics policy makers are hearing indications businesses can more easily raise prices.

Santomero is due to speak at North Carolina State University at 4:30 p.m. local time today.

``The dollar will have a bias to rise,'' said Tetsu Aikawa, a currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's largest lender by assets. ``Wholesale prices may support the view that inflation concerns will keep the interest-rate differential story going.''

The New York Fed said its Empire Manufacturing index unexpectedly fell to 12.1 from 15.6 in September. The median forecast of 35 economists surveyed by Bloomberg News was for an October index of 19.

A government report tomorrow will probably show U.S. wholesale prices rose 1.2 percent in September, the biggest jump since October 2004, after a 0.6 percent gain in August, according to the median forecast of 52 economists surveyed by Bloomberg.

To contact the reporter on this story: Rodrigo Davies in London at rdavies13@bloomberg.net.

Last Updated: October 17, 2005 09:15 EDT